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Cypen & Cypen
June 7, 2012

Stephen H. Cypen, Esq., Editor

1.     PUBLIC PENSION PLAN THRIVES:    When people say “Illinois pension” it automatically conjures up bad thoughts.  Well, courtesy of aiCIO, meet the woman who is running the $27 Billion Illinois Municipal Retirement Fund, which is not facing any regulatory backlash.  Dhvani Shah is its Chief Investment Officer.  The IMRF does not share the overwhelmingly negative outlook among state funds across the country.  It is not funded by the State of Illinois, but by local units of government, like municipalities, school districts and park districts.  The board of trustees has the ability to collect payment from employers to fund the system, which additionally receives regular employee contributions.  Historically, investment returns fund the majority—59%—of retirement benefits.  Because members in the system pay in full and on time, IMRF has money to invest and grow.  The fund’s current asset allocation includes a 12% target to alternatives (including real estate, hedge funds and private equity), 38% in domestic equities, 20% in international equities and 29% in domestic fixed-income.  The next frontier will probably be global bonds.  IMRF’s funding status stands at 83%, above the 80% threshold that is widely considered well-funded for public and private defined benefit pension plans in the US.  The goal is to find the combination of assets that will allow the fund to reach its 7.5% actuarial annual rate of return target over the long run, picking a combination of risk and non-risk assets that will deliver returns.  The funding position allows IMRF to stay disciplined to an investment program.  This certainty allows the fund to get the most out of its 70/30 equity-type/fixed income asset mix. 
2.      HIDDEN AND EXCESSIVE COSTS DRAIN RETIREMENT SAVINGS ACCOUNTS:     Though your retirement or bank accounts statements contain no evidence of it, everyone who has an IRA, 401(k) or any other individual retirement savings account pays a variety of fees every year.  But because these fees are taken off the top of investment returns or share prices, accountholders generally have no idea of how much it is costing them, according Demos.  The fees can be substantial:  over a lifetime, fees can cost a median-income two-earner family nearly $155,000, and consume nearly one-third of their investment returns.  Worse, these fees are often excessive and financial services companies can get away with charging higher-than-necessary fees for a number of reasons, namely:  the savers’ lack of information, inefficiency of financial markets and individualized investing, and the substantial costs -- both in money and time -- associated with switching between investment brokers.  Here are key facts from the brief:

  • According to a model, a two-earner household, where each partner earns the median income for his or her gender each year over their working lifetime, will pay an average of $154,794 in 401(k) fees and lost returns. 
  • A higher-income dual-earner household, one where each partner earns an income greater than three-quarters of Americans each year can expect to pay an even steeper price: as much as $277,969. 
  • The median expense ratio of mutual funds in 401(k) plans was 1.27 percent in 2010. 
  • Trading costs vary from year to year, but have been estimated to average approximately 1.2 percent a year, as well. 
  • In the long run, the average mutual fund earns a 7 percent return, before fees, matching the average return of the overall stock market; however, the post-fee returns average only 4.5 percent, meaning that, on average, fees eat up over a third of total returns earned by mutual funds.  
  • Smaller 401(k) plans have higher average fees than larger ones.  The median expense ratio for plans with less than 100 participants was 1.29 percent, while for plans with more than 10,000 participants, it was 0.43 percent. 

Demos is a multi-issue national organization, which combines research, policy development and advocacy to influence public debate and catalyze change.  Founded in 2000 and headquartered in New York City, Demos works with advocates and policymakers around the country in pursuit of its goals. 
   The American Society of Pension Professionals & Actuaries has issued a statement in response to Demos report entitled “The Retirement Savings Drain: Hidden & Excessive Costs of 401(k)s” in Item 2 above.  The report targeted 401(k)s as a retirement drain, saying fees associated with the plans outweigh any benefits associated with them.  ASPPA says the report’s analysis is based on irresponsible and unrealistic assumptions, including the assumption that the average fees for mutual funds in 401(k) plans are almost 200 basis points.  According to ASPPA, the only thing the report proves is that if one uses ridiculous and biased assumptions one can reach ridiculous and biased conclusions.  We will stand back and watch the two groups duke it out. 
4.      LOCAL GOVERNMENTS FACE DOUBLE-WHAMMY:    While states slowly recover in the wake of the Great Recession, local governments have been hit with a one-two punch:  state aid and property taxes, which together account for more than half of local revenues, are dropping simultaneously for the first time since 1980. According to The Pew Charitable Trusts, the blow comes  as demand for government services rises, driven by stubborn unemployment rates, population growth and other factors.  State aid funds nearly a third of local government budgets on average.  It fell by $12.6 Billion, or 2.6 percent, in fiscal year 2010, the most recent year for which comparative data are available.  This trend has continued, with 26 states reporting cuts for fiscal year 2011 and 18 doing so thus far for 2012.  Some cities, counties and school districts are fighting back with lawsuits.  Before 2010, state funding was covering a smaller share of localities’ growing expenses, falling from 33 percent in 2000 to 30 percent in 2009.  Property taxes, which amount to 29 percent of local government revenues, also are shrinking (but not in Miami-Dade County), reflecting the drop in real estate prices during the recession.  In 2010, property tax revenues were $11.9 Billion, or 2.5 percent, lower than the year before, the first annual decline since the mid-1990s and the largest in decades.  They fell again in 2011, by another 3.1 percent, or $14.6 Billion, and are expected to decrease further in 2012 and 2013.  This downturn is different from previous ones, when home values and property tax revenues remained relatively stable.  Some localities have raised taxes and fees to try to generate more revenues, but most have tackled budget pressures by reducing spending.  Policymakers have increased class sizes and shortened school days; cut a wide range of services, from public safety to trash collection; and privatized or consolidated certain functions, such as maintaining parks and handling 911 calls.  They have also eliminated public sector jobs, shedding half a million employees, or more than 3 percent of the local government workforce, since September 2008, through layoffs and attrition.  Half of those were teachers and other school administrators or staff members.  The local squeeze will be felt for years to come.  The nation’s ongoing housing crisis and fragile economic recovery, the likelihood of additional cuts in federal and state aid and greater demand for services all presage a rough road ahead for local governments.  Buckle your seatbelts. 
5.      QUALIFIED IMMUNITY APPROPRIATE WHERE AT TIME OF ARREST WAS NOT CLEARLY ESTABLISHED THAT AN ARREST SUPPORTED BY PROBABLE CAUSE COULD GIVE RISE TO A FIRST AMENDMENT VIOLATION:     Reichle and Doyle were members of a Secret Service detail protecting Vice President Cheney while he greeted members of the public at a shopping mall.  Doyle overheard Howards state that he was going to ask the Vice President how many kids he had killed that day.  Doyle and other agents observed Howards enter the line to meet the Vice President, tell the Vice President his policies in Iraq were disgusting and touched the Vice President’s shoulder as he was leaving.  After being briefed by Doyle, Reichle interviewed and then arrested Howards, who was charged with harassment.  After that charge was dismissed, Howards brought an action against Reichle and Doyle under 42 U. S. C. §1983.  Howards claimed that he was arrested and searched without probable cause, in violation of the Fourth Amendment, and that the arrest violated the First Amendment because it was made in retaliation for Howards’s criticism of the Vice President.  Reichle and Doyle moved for summary judgment on the ground that they were entitled to qualified immunity, but the Federal District Court denied the motion.  On appeal, the Tenth Circuit reversed the immunity ruling with respect to the Fourth Amendment claim because Reichle and Doyle had probable cause to arrest Howards, but the court affirmed with regard to the First Amendment claim.  In doing so, the court rejected Reichle and Doyle’s argument that probable cause to arrest defeats a First Amendment retaliatory arrest claim.  It concluded instead that U.S. Supreme Court precedent applied only to retaliatory prosecution claims, and thus did not upset prior Tenth Circuit precedent holding that a retaliatory arrest violates the First Amendment, even if supported by probable cause.  On review by certiorari, the U.S. Supreme Court held that Reichle and Doyle were entitled to qualified immunity because, at time of the arrest, it was not clearly established that an arrest supported by probable cause could give rise to a First Amendment violation.  Courts may grant qualified immunity on the ground that a purported right was not clearly established by prior case law.  To be clearly established, a right must be sufficiently clear that every reasonable official would have understood that what he is doing violates that right.  The clearly established standard was not present here.  The U.S. Supreme Court has never recognized a First Amendment right to be free from a retaliatory arrest that is supported by probable cause.  In addition, such right was not otherwise clearly established at time of the arrest.  Reichle v. Howards, Case No. 11-262 (U.S. June 4, 2012), 
6.      FEDERAL STATUTORY DEFINITION OF MARRIAGE VIOLATES EQUAL PROTECTION:    The First U.S. Circuit Court of Appeals was presented with several consolidated appeals presenting constitutional challenges to section 3 of the Defense of Marriage Act, which denies federal economic and other benefits to same-se.x couples lawfully married (in this case, Massachusetts) and to surviving spouses from couples thus married.  Rather than challenging the right of states to define marriage as they see fit, the appeals contested the right of Congress to undercut the choices made by same-se.x couples and by individual states in deciding who can be married to whom.  Following prior U.S. Supreme Court precedent in which local enactments without invoking any suspect classification were struck down, the appellate court agreed that same-se.x married couples are entitled to equal protection.  The Defense of Marriage Act defines marriage as only a legal union between one man and one woman as husband and wife and defines spouse as only a person of the opposite sex who is a husband or a wife.  The court stayed its decision pending the almost-certain Supreme Court review of DOMA.  Commonwealth of Massachusetts v. United States Department of Health and Human Services, Case Nos. 10-2204, 10-2207 and 10-2214 (U.S. 1st Cir., May 31, 2012)
7.      SHOULD PENSION PLANS START WRITING COVERED CALL OPTIONS?:     Writing covered call options against a portfolio of stocks to get extra income and hedge against downside risk is not new -- not to individual investors, who have been doing it for decades.  But, says, to pension fund managers, historically, covered call writing programs have been considered a marginal strategy.  However, over the last 18 months or so, in a volatile stock market, covered call writing options have done pretty well, so there is a new wave of interest from pension funds for the first time in a long time.  In the traditional form of covered call writing -- done more by retail investors, options are written on individual stocks, and the risk is that if the stock rises beyond the option’s strike price, the stock can be called away or claimed by the option holder at a price that has become a bargain.  In giving up the stock, the call writer sacrifices some of the stock’s gains but also gets the option premium as an offset.  Of course, if the option is not exercised, the option writer pockets the premium as profit.  Today, on the institutional level, buy-write programs, where a money manager buys a basket of stocks and simultaneously writes corresponding call options, are more likely to use a single option based on a broad market index such as the BXM, the Chicago Board Options Exchange’s S&P 500 BuyWrite index.  The index-based options are different because they are settled in cash and not by the transfer of shares.  The last time covered call writing options got a decent amount of attention from pension funds was after the relatively poor stock market performance of the early 1990s.  But during the raging bull market of the mid- to late-1990s, writing covered calls became a losing bet.  Rather than adding a little extra income to stock portfolios, covered calls nicked the gains.  The obvious rub is that these strategies truncate, or limit, the upside on stock portfolios, and previously, pension fund managers simply had no appetite for that situation.  In our view, inasmuch as most pension funds are long-term investors not traders, covered call options are inconsistent with that philosophy. 
8.      SAN JOSE, CALIFORNIA, PROJECTS BUDGET SURPLUS:    First time in ten years, San Jose appears set to enter its new fiscal year next month with a projected one-percent surplus.  The surplus is a big change from last year’s $100 Million gap, but it was only possible through painful decisions.  The cushion was created by pay cuts and lay offs, which the City does not want to go through again.  Most of the surplus, according to, will go to restoring city services such as road/infrastructure repair, gang prevention and opening newly-built libraries.  The budget now goes to the City Council for a series of hearings. 
9.      TEN IPOs THAT FLOPPED:     Facebook’s IPO may have failed to live up to expectations, but the social networking company is not alone as other companies befell the same troubles.  Here from pionline are those turkeys: 
Hertz – 7 years after the IPO, Hertz stock is still trading below its initial offering price. 
Zynga - the company went public in December 2011 at $8 a share; current share price is less than $7. 
Vonage – went public in May 2006, promising a block of IPO shares to its own customers.  A technical glitch delayed those purchases, so share price had already dropped by nearly 30%. 
Blackstone – launched public offering at $31 a share in June 2007.  The stock is now trading around $12. 
Lantronix - went public in August 2000 at $10 a share.  On the first day of trading, the stock price tumbled 20%.  The stock subsequently plunged to seventy cents a share.  
BoiseCascade - offering expected to come to market in 2005.  There were doubts about prospects of the offering, which was entirely scrapped.  
VeraSun - in June 2006 the stock launched at $23.  The company filed for bankruptcy protection in October 2008.   
Genuity - in its IPO filing in 2000, company took credit for delivering the world’s first email.  The company went bankrupt in November 2002. - the company went public in 2000 at $14 a share.  When the business shuttered in February 2000, the stock was trading at 19 cents. 
eToys - the company went public at $20 a share in 1999; price soon shot up to a high of $84.  At the time of its bankruptcy filing, shares were trading for 9 cents.   
So, things are not always as rosy as they seem, are they, Mr. Zuckerberg? 
10.    AGENCIES SIGN MEMORANDUM OF UNDERSTANDING AND SUPERVISORY COORDINATION:     Five federal supervisory agencies released a Memorandum of Understanding that clarifies how they will coordinate their supervisory activities, consistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The Act requires that the Consumer Financial Protection Bureau and the prudential regulators -- the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration and Office of the Comptroller of the Currency -- coordinate important aspects of their supervision of insured depository institutions with more than $10 Billion in assets and their affiliates.  Such coordination includes scheduling examinations, conducting simultaneous examinations of covered depository institutions unless an institution requests separate examinations and sharing draft reports of examination for comment.  The MOU is intended to establish arrangements for coordination and cooperation between CFPB and the prudential regulators, minimize unnecessary regulatory burden, avoid unnecessary duplication of effort and decrease the risk of conflicting supervisory directives.  Under the MOU, the agencies will coordinate examinations and other supervisory activities and share certain material supervisory information concerning:

  • Compliance with federal consumer financial laws and certain other federal laws that regulate consumer financial products and services;  
  • Consumer compliance risk management programs;  
  • Activities such as underwriting, sales, marketing, servicing, collections if they are related to consumer financial products or services; and  
  • Other related matters that the agencies may mutually agree upon.   

These coordination undertakings should lead to greater uniformity and efficiencies in supervision, and help to minimize regulatory burden on covered depository institutions.  FDIC: PR-61-2012 
:   The Florida Public Pension Trustees Association’s 28th Annual Conference will take place on June 24-27, 2012 at the Hilton Walt Disney in Lake Buena Vista.  The hotel is located across the street from Downtown Disney and has complimentary transportation to Disney parks.  There are a variety of restaurants within the hotel including a Disney character breakfast Sundays at Covington Mill.  A link on FPPTA’s web site,, will take you to the Hilton Walt Disney site to make your room reservations.  Sunday, June 24th the Associates Advisory Board is sponsoring the 24th Annual Associates Charitable Golf Classic held on Disney’s beautiful Magnolia Golf Course. You may access information and updates about the Conference at FPPTA’s website.  All police officer and firefighter plan participants, board of trustee members, plan sponsors and anyone interested in the administration and operation of the Chapters 175 and 185 pension plans should take advantage of this Conference. 
12.    GOLF WISDOMS:     The ball always lands where the pin was yesterday.       
13.    PUNOGRAPHICS:       I know a guy who’s addicted to brake fluid.  He says he can stop any time.        
14.    QUOTE OF THE WEEK:   “We rate ability in men by what they finish, not by what they attempt.”  Anonymous 
15.    ON THIS DAY IN HISTORY:  In 1989, for one second this morning, the time is 01:23:45, 6-7-89.  
16.    KEEP THOSE CARDS AND LETTERS COMING:  Several readers regularly supply us with suggestions or tips for newsletter items.  Please feel free to send us or point us to matters you think would be of interest to our readers.  Subject to editorial discretion, we may print them.  Rest assured that we will not publish any names as referring sources. 
17.    PLEASE SHARE OUR NEWSLETTER:  Our newsletter readership is not limited to the number of people who choose to enter a free subscription.  Many pension board administrators provide hard copies in their meeting agenda.  Other administrators forward the newsletter electronically to trustees.  In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at  Thank you.




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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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